Friday, July 23, 2010

The rate of growth of GDP accelerated sharply in the second quarter of 2010, with output in that quarter being 1.1% higher than in the first three months of the year. This is clearly very encouraging news. If the strength of the recovery is maintained over the remainder of the year, the economy could be better placed to withstand the government's plans for deficit reduction than appeared to be the case only a short time ago.

The world remains an uncertain place, however. Simultaneous fiscal retrenchment in many countries (including some of our important trading partners), a fragile housing market, the threat of renewed ossification in the banking sector (as evidenced by a rising LIBOR) all point to downside risks that remain significant.

Wednesday, July 21, 2010

It looks as though Vince Cable's graduate tax proposal, on which I commented in my last blog post, has been mercifully short lived. It is attractive to some because of the property that lifetime repayments rise with lifetime income. But, of course, if you want more progressivity, you can let the income tax system alone take care of that without recourse to graduate taxes.

The downside of the proposal would likely have been a cumbersome bureaucracy making controversial decisions on differential financial allocations to universities. And why, when the market could work out the appropriate resource allocations for free? To thrive, the higher education sector needs more freedom from bureaucracy, not another dose of Stalinism.

In other ways, though, a shift to a graduate tax might pose problems. Like it or not, it is difficult to see how the UK can, in future, fund world class universities without funding them differentially. It would be reasonably straightforward to achieve this with a system of differential fees - where students who attend the best universities pay a premium (which would have to be covered by a loan). Universities could set their own fees according to their perception of where they stand in the market. This is not so easy to achieve with a graduate tax. For sure, the government could fund the best universities more generously than others - but would those students attending universities that are lower down the food chain be happy to see their graduate tax payments used, in effect, to subsidise students attending universities higher up the rankings? Suddenly the tax no longer seems so progressive. It might, of course, be possible to set differential rates of graduate tax - a lower rate for students attending institutions that offer two year degrees perhaps (such degrees being another proposal doing the rounds) - but that seems dreadfully clunky. And does the government really know better than the market which are the best providers?

As ever with these mechanisms, the devil is in the detail.

It is curious that any government minister should have chosen to preempt the outcome of the Browne review at this stage. That, in itself, suggests that there is a long way still to go on the politics of this issue.

The latest consumer confidence figures from the Nationwide do not make pleasant reading. Consumer confidence has been falling since February, and the worsening state of the index on expectations is particularly striking.

In February, some 39% of respondents expected that, within 6 months, the economic situation in the UK would have improved; only 15% expected the situation to worsen. But the corresponding figures for June are 27% and 24% respectively.

These prospective indicators have a track record of predicting actual fluctuations in the economy rather well. A downturn in confidence and expectations does not necessarily foreshadow a downturn in the real economy. But these figures should give us plenty of reason to be cautious about the sustainability of the present recovery.

Thursday, July 01, 2010

Olivier Blanchard and Carlo Cottarelli have published their 'ten commandments for fiscal adjustment'. These are instructive. Commandment 2, which counsels against front-loading the fiscal adjustment, is particularly pertinent to the current debate in Britain.